Tuesday, December 29, 2009

THE STORYWe Americans love democracy. The idea of dictators dictating orders without a vote is not in our DNA. That’s why the USA likes spreading democracy around the world.

However, I’m not sure that putting everything to a vote in all situations is always the best idea. What if parents were barred from taking any action unless voted on and approved by their children? And what if parents had to do what ever their children voted on for them to do? I think that would cause a bit of a mess.

And what if every employee had the sole vote in how their individual career was managed (how much they got paid, what their title was, what work they did, whether they could get fired, etc.)? Probably the closest we ever came to that was the high levels of unionization in Detroit, and we can now see how that helped eventually destroyed Detroit’s economy.

And what if, in the middle of a war, soldiers refused to take any military action until all of the soldiers could have time vote on it? Military “orders” would merely be propositions to be voted on. With enemy bombs coming in your direction, reaction tactics would have to wait until a sufficient time for campaigning and voting occurred. And if each military unit independently voted on what tactic to take, there would be no unified military action…only chaos.

No, I think some areas of life need more balance between the input of the people and the wisdom of the leaders.

THE ANALOGYBusinesses are not true democracies. Most items are not put to a vote of the Board of Directors, the Employees or the Customers. Instead, business leaders tend to determine what they think is best and get the company to follow.

The advent of Web 2.0 technology has made it easier for businesses to gather the input from a wide variety of stakeholders. This makes it easier to, in essence, put all management decisions up for a vote with customers and employees.

Many are hailing this as a great and wonderful thing. There are even books and business pundits declaring that Web 2.0 requires business leaders to relinquish control of the business to the customers, who have now supposed taken control of all the power.

Indeed, having access to all of that Web 2.0 interaction can enrich the decision-making process. The input is very valuable. However, I’m not ready to abdicate all business leadership to “the will of the people.”

Just as children need good parenting and soldiers need good commanders, businesses need good, strong leaders. And just as employers need to consider more than just the will of their employees, businesses must consider more than just what the latest Web 2.0 feedback says. And just as there are times when children need to obey their parents and soldiers need to obey their commanders, there are times when “voting” needs to be set aside so that business leaders can be obeyed.

THE PRINCIPLEThe principle here is that all the exciting new Web tools are just that—tools to be used in the hands of leaders. They are not substitutes for leadership—especially when it comes to strategy.

About a month ago or so, I was reading a story in Fortune magazine about Best Buy. There was a quote in there from current Best Buy CEO Brian Dunn.

“One of my roles as CEO is to be the chief listener. I don't believe that the model is any longer that there are a few really smart people at the top of the pyramid that make all the strategic decisions. It is much more about being all around the enterprise, and looking for people with great ideas and passionate points of view that are anchored to the business and connected to things our customers care about.”

At first, this quote sounded good to me. Dunn was using the wisdom of others to help make more informed decisions. Then I thought about it for a second longer. This is more than just getting input. This was starting to sound like abdicating responsibility for creating strategy. Strategic leadership seems to have been banished from the organization. Rather than having tactics derived from strategy, strategy appears to be belittled to nothing more than the culmination of a series of independent and unconnected tactical decisions made “by the people.”

Tactics shouldn’t drive strategy. Strategy should drive tactics.

Dynamite can be a very useful tool, but without skilled dynamite users, the tool can destroy you. Similarly, feedback from others is a powerful tool, but if you eliminate the role of professional strategists at the top of the organization to properly apply it, it can destroy your company.

You need both—the tool (feedback) and the professional tool handler (the strategist). Eliminating the strategist can lead to the following problems.

1. Mistaking Ideas for StrategyInteraction with stakeholders is a wonderful way to get ideas. Ideas are great, but they are not strategy. Strategy gets to the heart of the matter: What business should I be in? What is my competitive advantage? What business model should I use? How do I win in the marketplace?

Not all ideas are appropriate for all companies under all conditions. Good ideas are the ones which support the strategy. Great strategic leaders understand their strategic thrust and can cull out the best ideas for their particular firm from the others. Leaving it up to a vote gets what’s popular, not what’s appropriate. For example, consumers may all want low prices, but typically only one firm in an industry is the lowest-cost operator. For everyone else, a priced-based strategy is probably not going to win, regardless of what the people say they want.

2. Missing the Big PictureOne of the major benefits of business strategy is getting “the big picture” vision correct. Great “big picture” visions rarely materialize out of merely following the whims expressed in a series of votes on minor tactics. Creating these visions cannot be fully abdicated to others. Leadership needs to take possession and ownership of visioning process.

Your big picture goal is to optimize the opportunities for your firm. That is not the same goal as your stakeholders. Your customer’s goal may be to get everything, perfectly, instantaneously, and free. If all you do is try to serve their selfish need, you will not be optimizing your own goal. Their objectives are not always in complete alignment with yours. You need to filter their ideas through your objectives.

In addition, the people you talk to only have limited knowledge of a small part of your overall situation. Hence, their ideas are biased towards their limited perspective. You need professional strategists to bring all of the knowledge together in order to create a comprehensive and complete picture of what is going on in the world. Only when you can see the big picture will you see the best strategic alternative.

Finally, great strategy, according to Michael Porter, is about choosing the right trade-offs. Your customers may not like it when you make trade-offs (they want it all), but it is often the only way to create excellence at some point of differentiation. You need to be a strong strategic leader and determine where those trade offs will be. Then you need the fortitude to stick to the principles of your tradeoff and not fall victim to the trap of trying to do everything well and failing to do anything well.

3. Missing Discontinuous ChangeChange in the marketplace tends to revolutionary, rather than evolutionary. New categories and business models seem to spring out of nowhere. On-line travel firms like Orbitz, Expedia, and Travelocity gave a death blow to traditional travel agents almost overnight. Bottled water came out of nowhere to become a huge industry. Digital everything destroyed analog everything. Mobile phones, microwaves and laptop computers changed the entire nature of how people live and work, impacting almost every other industry. Newspapers used to be one of the most profitable industries in the world. Now they are bleeding badly. The recent recession quickly changed the fortunes and the rules for a lot of industries, particular in the financial arena.

As long as the marketplace is stable and the rules and players don’t change, it is easy to forget about strategy. Just talk to all of the stakeholders who are comfortable with the current situation and you will get all kinds of ideas for useful tactics to tweak the system.

However, when radical change occurs, this management by talking becomes far less useful. There is no consensus in your stakeholders as to what to do. They have no direct experience in the change for you to benefit from. Mere tactical improvement suggestions won’t succeed when all the rules are changing.

Professional strategists are needed to:

a) Help anticipate the discontinuous changeb) Develop scenarios in advance so as to be prepared when change occursc) Help the company to become proactive in change and help bring about change in a fashion which disproportionately benefits your company.

Apple doesn’t wait to react to change. They didn’t “take a vote” of the world before introducing change. They lead the change. Ipod and iTunes reinvented the business model for music. Iphone reinvented smart mobile devices and the selling of aps.

As Henry Ford put it, “If I’d asked my customers what they wanted, they’d have said ‘a faster horse.’” Suggestions from the masses tend to be extensions of what they know, which is the old business model. They are not very useful in proactively getting to the discontinuous new. And unfortunately, the discontinuous new is all around us. This is where professional strategists are most valuable.

SUMMARYAlthough there are many tools available for mining the ideas of your stakeholders, this is no substitute for having professional strategic leadership activity at the top of your organization. The best of all worlds is to have both—the insights of your stakeholders put into proper perspective by professional strategists.

FINAL THOUGHTSBenjamin Franklin once said, “When the people find they can vote themselves money, that will herald the end of the republic.” Similarly, when users of Web 2.0 tools find out how to manipulate the system, it could herald the end of the current fashion of capitalism (of abdicating strategy to the masses), because they will suck all the money out of the business model, leaving you with the losses.

Tuesday, December 22, 2009

STORYThere’s an old story about a man watching workers build a church. He goes up to each of the workers to ask what they are doing.

The first worker says he is laying bricks. The second worker says he is laying panels for the floor. The third worker says he is building a place to worship and glorify God.

Guess which worker is probably doing the best quality of work.

THE ANALOGYAll three workers were doing a small part to help build a church. But they viewed the nature of their work differently. Two defined their work by the particular task they were doing—laying bricks or laying a floor. One, however, saw the big picture and defined his work a being part of what he viewed as a noble cause—building a place to glorify God. And of course, the one with the nobler definition of his work is the one who will tend to produce the greatest outcome, because he sees a deeper importance/significance to his performance.

Businesses have the strategic option of defining themselves just like these workers. They can define the work as being a mundane task—like manufacturing widgets—or as part of a larger, more noble task—like making the world a better place.

And the more you imbue a task with a noble purpose, the better off you tend to be. Strategic planning has an important roll in helping to frame a company’s mission so that it imbues the business with a noble purpose.

THE PRINCIPLEThe principle here is that companies with a noble business mission can tap into benefits than mundane missions cannot.

1) Additional Sources of RevenueNoble companies have three additional sources of revenue. First, they can typically charge more for their products. According to the 2009 Corporate Citizenship Study, people are willing to pay more for products from socially responsible companies. Forty percent said they would spend between 1% and 10% more for a product from a socially responsible company.

Consider TOMS Shoes. TOMS Shoes was founded on a simple, noble premise: With every pair you purchase, TOMS will give a pair of new shoes to a child in need—one for one. To this, they also add the idea of having vegan shoes—no leather (save a cow).

TOMS’ shoes are not cheap. Their simple canvas shoes are about $50. I can go to Wal-Mart or Target and get a simple canvas shoe for half that price (or even less). Yet people are willing to pay a premium for a TOMS shoe. Why? They like the noble idea that whenever they buy a shoe, a person in need gets a free shoe. That is worth a premium price.

Second, a noble cause provides new sources of revenue. Who says you have to earn all of your income from your purchase price? That purchase price can be subsidized with additional income from other sources.

Consider many cause-related media companies. It is getting harder to be profitable in the magazine business these days. Many publications are calling it quits and shutting down because subscription and ad revenues are not enough to remain profitable. However, one cause-related magazine I subscribe to has started a new campaign with its subscribers. It is touting the noble purpose of the publication and asking for additional donations beyond the regular subscription price. It says that it is worth giving extra to keep the noble magazine and its important message in business. I’m sure that extra money is coming in. This is something that a mundane magazine cannot tap into.

If your cause is really noble, there are opportunities to tap into government funds, charitable funds/endowments, or sponsorship ties with other companies that will pay you in order to associate themselves with your noble endeavor.

An example would be St. Jude’s Children’s Research Hospital. In many ways, it is a hospital just like any other hospital. Yet, on top of this, they have imbued a greater sense of nobility to the hospital business. It does more cutting edge research and never turns away a child due to an inability to pay.

As a result, St. Jude’s taps into a lot of additional revenue sources more successfully than many other hospitals. It is strongly promoted by many in the acting community. It has a nationwide charitable program. It has a partnership program with many retailers, including Target, Kmart, CVS, Williams-Sonoma, Dollar General, Brooks Brothers and others.

The third revenue benefit of a noble mission is that there are the added revenues which come from having loyal customers who volunteer to be an advocate for your company. TOMS, for example, has a DVD describing their noble cause and encourages customers to hold DVD parties at their homes to spread the word. TOMS also encourages and helps customers set up parties in their homes to customize and decorate TOMS shoes. On April 8, 2010, they are encouraging customers to bring attention to the noble cause by going a day barefoot. And of course, there are all the web 2.0 opportunities with Twitter, Facebook and the like to build a strong, loyal TOMS community.

Loyal customers will buy more from you and act as evangelists to get others to buy from you as well. And this loyalty is stronger, the more noble the mission of the company.

2) Additional Ways to Lower CostsNot only does increased nobility improve the top line. It can also reduce costs, further improving the bottom line.

Going back to the 2009 Corporate Citizenship Study, they found that people highly value the idea of working for a socially responsible company. Fifty-six percent said that it would make a positive difference for them. Even more telling, 40% said they would be willing to take a small pay cut to work for a socially responsible company.

For years, private schools with noble causes (principally religion-based) have traditionally paid their teachers less than those working for public schools. This idea does not have to be limited to just schools. Bring a greater nobility to the cause at your business. Not only are the employees who desire to work at noble companies more motivated, you do not have to pay top dollar to get them. The privilege of spending the day feeling a part of a larger, more noble purpose is worth sacrificing for.

This idea can also be used as leverage with your suppliers to negotiate lower costs. They may give you a break if they realize that their lower price to you is contributing to a greater noble cause.

Finding Your NobilityPerhaps your sense of nobility is not as great as what was seen in some of these examples. But that doesn’t mean that you cannot change your business model to become more noble. St. Jude could have used a more conventional hospital business model, but they chose not to. You can change your business model to become more noble as well.

You could perhaps do a one for one program like TOMS on your product/service. You could be like Target, who gives 5% of its income to charities in the markets where it has stores. Best Buy is getting more involved in sustainability issues with the products it sells, accepting returns of old electronics items and working with its suppliers to help design more sustainable products. Wal-Mart is getting ever more active in environmental causes. The change in Wal-Mart’s reputation has improved significantly once they took a more noble approach and I believe it has helped them in many ways. The list goes on.

The way you define your strategic mission has a lot to do with how your employees, customers and other stakeholders view the company. It can not only change the perception, but also the reality of how noble a company you really are.

Consider these mission statements:

Google: To organize the world's information and make it universally accessible and useful.

Proctor & Gamble: Provide branded products and services of superior quality and value that improve the lives of the world's consumers, now and for generations to come.

Johnson & Johnson: To provide scientifically sound, high quality products and services to help heal, cure disease and improve the quality of life

Herman Miller: Herman Miller, Inc., works for a better world around you. We do this by designing furnishings and related services that improve the human experience wherever people work, heal, learn, and live.

And it cannot just be hollow lip service. The mission needs to be more than just words on paper. It has to be lived every day by senior management, supported by where the capital is spent, evidenced in how employees and customers are treated, and a key element of the discussion on all major decisions. In other words, it must be fundamental to the strategy. If done properly, not only will you do well (quality of social responsibility), but you should also do well (enduring, profitable company).

SUMMARYCompanies with noble missions have access to many advantages. Customers are more loyal and act as advocates for your company. You can get away from competing only on price (and perhaps raise prices a little). You can tap into more sources of revenue. You can attract highly motivated workers who do not necessarily need to be paid top dollar. And you can feel good about not only building a strong business, but also a better world.

FINAL THOUGHTSNow you may be saying to yourself that your business really is rather mundane and that there is not a lot of nobility in what goes on. Yet consider the investment banking industry. Currently, many see investment bankers as the scum of the earth. Large sectors of the population see nothing noble in the way they operate.

However, listen to the way Goldman Sachs CEO Lloyd Blankfein defines his work (from The Sunday Times, November 8, 2009). “We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. We have a social purpose.” He is, he says, just a banker “doing God’s work.” (something like the attitude of the church builder in our story?)

I’m not saying that you need to agree with Blankfein’s assessment. However, if he can find a way to put such a noble spin on what he does, I would think that you can do the same for your business.

Sunday, December 20, 2009

THE STORYMany years ago, just before I was to receive my MBA, I met someone I did not know in the hallway at the University. He was also about to graduate.

Although I was trying to ignore him, he came up to me and started talking with a big grin on his face.

He said, “Do you know why I am graduating with a degree in accounting and getting a CPA?” He didn’t wait for a response and immediately answered his own question, “Accountants get one of the highest starting salaries right out of business school, and people who make the most money get the most sex.”

THE ANALOGYHere was someone who had a personal “strategic” plan. However, it seemed a little bit one-sided to me. It was all about what was in it for him (money and sex). There didn’t seem to be much concern for the people who would be paying him that money or the people he would have sex with.

At some point, I would suspect that if the only reason he was an accountant was for the money (and he had no love for the profession) that the joy of money would decline and the hatred of accounting would increase. Similarly, if he was only able to get sex because of the money, then over time the joy of the sex would decline and the futility of the meaninglessness of that sex would increase.

This individual’s focus appeared to go straight to the ends (money and sex) without considering the means (the nature of the work and the quality of the intimate relationship). Over time, I think he will lose some of the joy for those ends because of not attaining them in a meaningful or satisfying manner.

This can also happen in business strategies. If the focus of the strategy is on one-sided ends (e.g., get huge bonuses, put big numbers on the bottom line) and ignores the means of how to get there (what the business does), it can lead to a long-term disaster.

THE PRINCIPLEThe principle here is that long-term success is more likely if you focus on the “means” rather than the “ends.” Therefore, strategic plans need to focus more on the means than the ends.

For most “for profit” enterprises, the end is to grow profits, i.e. make more money and improve the return on investment. Although this is not a bad goal per se, it is a lousy strategic focus.

A strategic mission statement saying, “We want to make a lot of money” is not very useful. It provides no guidance as to what to do. It doesn’t rally the troops around a particular type of work. And worst of all, it does not provide an incentive for potential customers to give you their money.

Business is a two-way street. In order to sell something, someone else has to purchase it. These purchasers typically have multiple options. They do not have to give you their business. They can give it to someone else. If your strategy does not focus on a way to get customers to prefer you, that ultimate goal of making lots of money won’t happen.

This is especially true today. Consumers are so angry at the perceived greed of business people, that they now are expecting even more accountability from them. More than ever, they want to patronize companies that have a social conscience, who are good corporate citizens. And thanks to the internet, they will find out how sincere you are. You cannot hide. The type of corporate citizen you are will help determine whether they buy from you. This is not a fad. This is part of the new normal.

That is why one of the most important strategic questions you can ask is “What can we do for our customers that will cause them to prefer us over their spending alternatives?” You can see this line of thinking in Proctor & Gamble’s new mission statement—“to touch and improve more people’s lives, in more parts of the world, more completely.”

This new mission has opened up a world of new sources of profits to P&G in places where they never went before. As C.K. Prahalad shows in his book “The Fortune at the Bottom of the Pyramid,” there are a lot of profits to be made among the poor if you focus on ways to improve their lot in life. This is what P&G is doing. But it only works if your focus is on bettering the poor rather than bettering yourself.

Here is the great irony. The more your strategic effort focuses on your customers (and the less it focuses on your rewards), the greater your rewards tend to be. There are three reasons for this.

1. Right FocusWhen you focus on what the customer wants, you end up focusing on the “means”—the nature and process of what you do. You look for ways to meet the customer’s needs and desires. And when customers see you as the better alternative for them, they will give you their money.

Strategy is about helping you figure out what to do. Do the right things and the rewards will come. The right thing to do is to create a positive differentiation versus your competition on attributes important to a potential customer segment. This comes from focusing on what you do for others.

Unfortunately, this is not what all strategic planning processes do. I’ve seen businesses use their strategic planning session primarily to set a numeric goal as to how much money they want to make. The discussion is around how big of a number (Sales, Profits, Return on Investment, EVA) they want to achieve by a certain point in time in the future.

This is selfish one-way thinking. Just because you can build an elaborate spreadsheet and graphs showing what this type of goal looks like does not mean it will automatically happen.

What I’ve seen happen is panic set in when the company gets close to the goal year and is nowhere near hitting the numeric goal (because the plan never focused on the means for achieving the goal). Desperate measures are taken to hit the numbers. These desperate measures rarely lead to long-term success.

The better focus is to set goals for specific operational outcomes that are customer-centric (improving quality, reducing costs, improving the business model, adding features, etc.). The idea is to focus on making a better two-way street. Focus on finding ways making customers prefer you, and the ends will come.

2. Right PeopleIf the only thing you offer people is a means to satisfy their greed, then you will attract greedy people. Overly greedy people tend to destroy the long-term viability of a firm. I saw a study several years ago which asked investment bankers if they would still be in that profession if it stopped paying exorbitant wages. Over 80% said no. They were only there for the money. They didn’t care much about the products they dealt with, the risks they took or the people getting mortgages they couldn’t afford or the people insuring those risks. And that attitude I believe had a lot to do with how we got into the big financial mess we are in today.

I was talking to an executive of Enron before its demise. We were discussing how Enron expected very high levels of effort, but rewarded people very well if they succeeded. I asked him if it was difficult to get people like that. He said that most of their hires came from investment banking and were used to that type of culture. Well, we saw what happened when you get too many people of that attitude at Enron.

However, if everyone sees you as a company focused first on the customer, you will attract the people who like putting the customer first. These are the people who are most useful in building a strong, lasting company, a place where customers want to spend their money.

3. Right MotivationWhat do you think motivates the rank and file employee more—lining the pockets of the top executives with big bonuses, or making the world a better place? P&G’s new mission talks about making the world a better place. So do many other firms (see this prior blog for examples).

A noble purpose causes people to care more about what they do. When they care more, they tend to perform better. There is a greater motivation to do well, because it has more meaning to what is being done.

Strategic mission statements should provide that type of inspirational motivation, because people highly motivated to serve customers tends to lead to great results.

SUMMARYIf you want great financial results, don’t focus your strategic planning process on getting great financial results. Instead, focus on how to give customers greater benefits than they can get anywhere else. Customers are the ones who control much of your financial success. If you convince them that you are their best option, they will give you their money (making you financially successful).

FINAL THOUGHTSThis Christmas season brings to mind the idea of giving. If you keep this giving attitude all year ‘round, you have the foundation for a successful plan.

Thursday, December 10, 2009

THE STORYI heard a story about a hotel located along the gulf coast of Texas. The balconies overlooked the gulf. One time, one of the guests thought the balcony was close enough to the water that he could fish from the balcony. Therefore, he put a heavy weight on his fishing line so that he could cast the line a long way. Then he tried casting the line out into the gulf.

Unfortunately, the gulf was farther away than he thought. The line did not go out that far. Instead, the line swung back towards the hotel. The heavy weight on the end of the line crashed through one of the hotel’s glass windows, creating an expensive and dangerous mess.

Although this had never happened before, the hotel officials wanted to make sure that it never happened again. Therefore, they put signs on all the balcony windows saying “Do Not Fish Off the Balcony.”

When future guests saw these signs, it put the idea into their head that perhaps it is possible to fish off the balcony. Suddenly, lots of people were trying to fish off the balcony. And lots of windows were being broken.

Not knowing what else to do, management took the “Do Not Fish Off the Balcony” signs off the windows and threw them away. Immediately, the fishing off the balcony stopped.

THE ANALOGYNormally, one of the outcomes of a strategic plan is a desire to get people to act in a particular way, be that employees or customers or the government or competitors, etc. As we saw in the story, sometimes the direct approach will fail. Telling people not to fish actually increased the fishing.

The direct approach often fails with business strategies as well. Telling competition not to attack you in a particular way rarely stops them. In fact, it may make them want to do it more, because your insistence makes you appear vulnerable in that area. Worse yet, if you work too directly together with your competition, you could face criminal charges of collusion.

As a result, often the best way to get people to act in a particular manner is through indirect persuasion. Rather than directly mandating or banishing certain behavior, use a tactic which indirectly results in the behavior you want.

THE PRINCIPLEThe principle here is that the fastest way from point A to point B may not be a straight line. If people can see you coming straight at them in a straight line, they can build up defenses to your path. However, if you come after them indirectly, they may not be able to perceive what your ultimate objective is. Not knowing the ultimate objective can reduce resistance to the behavior change you are trying to create.

I was reminded of this principle in reading an interview with Ryanair’s chief executive Michael O’Leary in the Wall Street Journal. O’Leary was talking about their leadership in being one of the first airlines to charge a fee for checking in baggage. This was not a direct ploy to get more money out of its passengers. No, it was an indirect ploy to dramatically reduce total fees, thereby improving Ryanair’s strategy of having by far the lowest prices.

The idea was that one of the more expensive aspects of the airline business is running the check-in counters at the airports. Ryanair knew that if they could eliminate these costs, they could increase their relative value. However, if they would have directly commanded people to no longer carry bags and no longer use a check-in counter, there would have been a revolt. People resist such direct orders to change behavior. Such a direct banishment would have been as effective as those “Do Not Fish Off the Balcony” signs.

Instead, Ryanair started charging fees on checked baggage so that people VOLUNTARILY stopped checking in bags. Without bags to check in, Ryanair could eliminate the labor at the check-in counter. It is now 100% web-based. Rather than creating a revolt, the customers are happy because they no longer have to wait in long check-in lines and ticket prices were kept low.

Now, Ryanair is considering the idea of charging money to use the lavatories on the airplanes. Again, the idea is not to get additional income off the toilets. Instead, it would be an indirect means to change behavior. The thought is that this would cause passengers to voluntarily use the lavatories at the airport prior to boarding. This would reduce the demand for toilets during the flight, allowing Ryanair to reduce the number of lavatories on the plane. Fewer lavatories would mean room for more seats. Having more seats per flight means they would need to charge less per seat to make a profit. Hence, the strategy of having the lowest fares would be strengthened.

Another example occurred in the attempt to stop smoking among youth in the United States in the 1990s. The direct approach of telling teens “Do not smoke” was not working. Therefore, the anti-smoking advertisers switched to an indirect approach. They used fellow teens to tell the youth that the evil big-business tobacco companies had no respect for them and were trying to manipulate them with lies.

Well, no teen wants to be manipulated by adult authority figures, so the new message got teens angry with the tobacco companies. To “punish” these companies, the teens decided on their own not to smoke. This indirect approach was more effective in cutting down teen smoking than the direct approach.

So how do we apply this principle to your strategy?

Step #1: Identify the New Behavior Required by the StrategyThe first step is to determine what behaviors are needed to make your strategy a reality. What different behavior is required by your company and its employees? What different behavior is desired from your supply chain? Your customers? Your competition? Your shareholders?

If you cannot easily identify the new behaviors then how do you expect those behaviors to happen?

Step #2: Look for Incentives That Indirectly Create Voluntary Behavior ChangeThe next step is to use the Ryanair approach and look for ways to make people voluntarily want to do what you desire. This usually requires an indirect approach that prioritizes what is in the best interest of the people whose behavior you want to change. The idea is to find that ideal intersection where their selfishly desired behavior just so happens to be the same behavior you selfishly desire.

Then appeal to their selfishly desired behavior. This will indirectly get you your selfishly desired behavior without ever having to mention it. Ryanair selfishly wants to put more seats on the plane, but the appeal is by making it in the passenger’s selfish best interest to use the lavatories at the airport.

Step #3: Integrate Indirect Incentives Into Your Strategic Action PlanIf you want something to happen, spell it out and make it known. So once the indirect incentives are figured out, spell it out in the strategic action plan. Don’t make the indirect tactic a mystery. Just because it is an indirect tactic does make it less critical to your success. The link to your success is direct even if the customer/employee/supplier cannot see the connection.

SUMMARYPeople often resist direct appeals to change their behavior. In fact, they may rebel and do more of the opposite of what you want. Therefore, the best approach is often to appeal to them indirectly—get voluntary compliance by finding something in their best interest which indirectly is also in your best interest.

FINAL THOUGHTSWhen people are asked to do something, a common response is WIIFM (What’s In It For Me?). The more you appeal to their WIIFM, the more likely you’ll also get what’s in it for yourself.

Wednesday, December 9, 2009

THE STORYHaving spent time in college as a radio DJ, it is no surprise that one of my favorite TV shows of the past was “WKRP in Cincinnati,” a show about the radio business.

The station manager on the TV show was Mr. Carlson. Mr. Carlson didn’t like managing the radio station (owned by his mother). Since he didn’t like dealing with the radio business, he spent a large part of his day playing with toy trains.

Mr. Carlson was afraid that spending the day playing with trains would make him look unprofessional. The staff would cheer him up by saying something like, “You aren’t playing with trains. You’re a ‘Train Hobbyist.’ All the great business executives have hobbies. You are a connoisseur of trains and a collector of train replicas.”

That pep talk would make Mr. Carlson feel better, and he would go back to playing with his trains.

THE ANALOGYThere are only so many hours in the day. The daily pressures of what to do with those hours can be intense. Yet, in spite of all the demands on our time, we seem to find time for our hobbies.

Hobbies are the things we really like to do and prefer to spend time on. For the fictitious Mr. Carlson, his hobby was playing with toy trains. He could always find time to play with them.

In the business world, daily pressures demanding your time can come from many different sources. There can be problems with key customers, production issues, supply chain problems, price wars, and so on. The daily tyranny of the immediate can drain all the time out of a day, leaving nothing left for pondering long-term concerns. As a result, time tends to run out before executives get around to the serious effort needed to create great strategic plans.

So what is a strategist to do in order to fight for executive time and attention? Well, as I said earlier, executives always seem to find time for their hobbies. Therefore, if you want to get top management attention, you need to make them into “Strategy Hobbyists.”

THE PRINCIPLEA dear old friend of mine used to say that strategic planning departments exist at the whim of senior management. His point was that all businesses have to have things like Human Resources Departments, Accountants, Lawyers, Salespeople and Operations Managers. However, having professional strategists on staff is optional. Many have them; many don’t. It only exists if by whim the management wants it.

Therefore, part of the role of a strategist is to get the audience to want strategy. Otherwise, they will eliminate it (or give it so little time that the process is destined to fail).

As my friend put it “You need to become the plaything of management.” In other words, your goal is to have them want to play with strategy in the same way Mr. Carlson wanted to play with toy trains. Or, as I put it, “You need to make strategy their hobby.”

In general, I believe that people are looking for three things from their hobby. Therefore, if you want to get top management to make strategy their hobby, you need to find ways to have strategy supply these three things. They are discussed below.

1. Boost Their EgoHobbies make people feel better about themselves. This can be both in an absolute sense and a relative sense. In an absolute sense, hobbies can provide the opportunity to become an expert in something. It feels good to be an expert in something. One reason why many hobbies involve making things with one’s hands is that one can proudly look at the completed piece and say “I made that.”

In a relative sense, hobbies can provide status relative to others. If you are the expert, people come to you for advice. They look up to you, and not just because of your title. And it allows you to tangibly demonstrate that you are better than others. Part of the fun in playing golf is when you can beat others because of your superior playing ability. It is a way to elevate your stature in a competitive world.

How can we apply this to strategy? Appeal to their egos. Help them see that becoming experts in strategy will boost their stature with their peers. It will help them beat their competition in a way more satisfying than golf. Show them how enacting a business plan can be a way to make a tangible difference to the company that they can point to and say “I did that.”

Unfortunately for the strategist, when you build up their ego, it means focusing attention away from your own ego. However, this can be a small price to pay to keep within their whim.

2. Let their Imagination EscapeGood hobbies help people temporarily escape the drudgeries of the day and transport their mind to a more enjoyable place. Mr. Carlson could escape the drudgeries of being a boring station manager and pretend to be a rail baron during the heyday of the train industry.

Golf courses transport you to a place of lush greenery which feels worlds away from the office. Being the captain of your own sailboat out on the lake feels powerful, free and in control, far from the normal world which often feels out of control. Working with wood or spending time gardening can taking you back centuries to a world that seems a lot less complicated. Hobbies take you to another world—another role—which is a pleasant escape from the norm.

How does this apply to strategy? Strategy is about creating visions of a better and brighter future. It is a way to escape the tedium of the immediate and focus your imagination on good times. In imagining the future, you are in control and things are going your way. You can tackle big issues—fun issues—instead of the petty boring things which normally turn up. Show them that strategyy is a legitimate and honorable way to escape the tedium for awhile.

3. Be Fun Hobbies are to be an alternative to “work.” Yes, a lot of work may go into a hobby, but the secret is that is does not feel like “work.” It feels like fun.

Does your strategic process feel like fun? I’ve talked to many executives who groan when they are told they have to do strategy work. They hate it. To them, it seems like going through the motions of filling out boring forms, going to dull lectures, and getting books filled with boring statistics. Rather than being an alternative to tedium, it becomes tedium at its worst.

Don’t fall into this trap. Make strategic planning a fun escape that executives look forward to. If it is seen as fun and important, then people will gladly do the work of strategy and create something meaningful. If it is just seen as useless busywork, you will get halfhearted, worthless participation.

SUMMARYSince strategic planning is often viewed as an optional activity, executives can opt not to do it. Instead, they can fill their time with the pressing issues of today. If you want to make strategic planning a priority, you need to make it appear like a hobby—something people always seem to find time for. To do so, you need to show how strategic planning can boost their egos, let them justifiably escape the tedium of today and have fun. That will get you the time and attention you need to produce a quality plan.

FINAL THOUGHTSStrategy is still hard work. But if it seems like a hobby, then it doesn’t feel like hard work.

Friday, December 4, 2009

THE STORYIt is a commonly accepted principle that if you want to spend less at the supermarket, eat before you go shopping. The idea is that you tend to buy more groceries when you are hungry. Therefore, if you eat first, you won’t be hungry when in the supermarket looking at all that food.

My wife believes in this principle and eats before grocery shopping. She claims it cuts back on purchases.

Me? I have a different approach. I used to work in the grocery business, so when I am in a supermarket, it reminds me of going to work (and the things other employees do to the food when working in a supermarket). For some reason, that takes away my appetite.

THE ANALOGYIf you are hungry, you desire food. That desire (hunger) seeks to be satisfied. That’s why hungry people tend to buy more at the supermarket.

This concept applies to more than just food. No matter what you sell, the general idea is usually to satisfy some sort of demand (appetite). The concept is to find a need and fulfill it better than anyone else. People will purchase from you in order to satisfy that need.

Seeking to satisfy customers—sounds like a rather basic truth, right? Well, there’s only one problem with this approach. Once a customer is satisfied, their desire is fulfilled. The demand goes away.

You may be better off if you eat before grocery shopping, but the grocer is not. The grocer would rather that you came to the store hungry. As a business person, you want hungry customers as well—hungry for what you have to offer.

Unfortunately, once you truly and completely satisfy that hunger, the game is over. If the customer is completely satisfied, then they no longer have that need, so they no longer need to patronize your business.

Think of it like a kidney transplant. If I have a defective kidney, then I desire a new one. When the hospital does an excellent job with the kidney transplant, that need for a new kidney is completely satisfied. I’m not going to say, “Boy, that hospital did such an excellent job, I’m going to come back every month to get a new kidney.” No, I’m all done with that desire. It is fully satisfied. No more new kidneys for me.

The people doing kidney transplants would go bankrupt waiting for repeat kidney transplant business from their patients. The surgeons have to keep seeking out new patients, because they do too good of a job satisfying the former patients. As in the case of the grocer, the more satisfied the customer, the less additional business they will get from that customer.

THE PRINCIPLEThe principle here has to do with the concept of satisfaction. Many businesses give a high priority to completely maximizing customer satisfaction. Bonuses at these places may even be based on the level of customer satisfaction. The idea is that the more satisfied a customer is, the better.

Unfortunately, as we have seen, if a customer is completely satisfied, then they have no additional demand (since the demand is completely met). In many cases, a fully satisfied customer no longer even needs to be a customer (or at the very least needs you less). So, perhaps complete satisfaction is the wrong goal.

Yes, we want to make customers happy, but we also want to keep them hungry enough so that they keep wanting/needing to coming back. A part of them still needs to be unsatisfied, wanting more.

Therefore, instead of focusing on “Customer Satisfaction,” I suggest a focus on “Customer Engagement.” A lot of literature has been written about how employees are more productive if they are fully engaged with their work. I think the same is true of customers. A customer fully engaged with what you are offering is a more productive customer. They will keep coming back.

Consider Ty Warner and his Beanie Babies. He never advertised them. He refused to sell them to any of the major toy retailers. Ty limited the number of Beanie Babies that any retailer could order (no more than 36 of any style per month), no matter how many they wanted. Then Ty would retire styles while they were still popular.

That certainly doesn’t sound like someone who wants to maximize consumer satisfaction. He made them hard to find, in insufficient quantities, and stopped producing them when they were still in demand. Yet this very “un-satisfaction” approach maximized consumer engagement.

People clamored to the stores to seek out the new Beanie Baby styles before they ran out. There was a mad rush when the new styles came out, and often this lead to fistfights since there were never enough to go around. Customers were tickled to death to be one of the lucky ones to get a particular style. A collectors market came about, with lots of books and web sites to help people trade Beanie Babies with others. Ty had successfully turned “customers” into avid “hobbyists.”

According to Ty, “As long as kids keep fighting over the products and retailers are angry at us because they cannot get enough, I think those are good signs.” Ty Warner understood that his success was not based on satisfying retailers or customers. It was based on engaging them.

A similar principle is used by Jean-Claude Biver, who has had a long, successful career in the Swiss watch industry, currently running Hublot. Biver would always ration his luxury watches. Even during the boom times, he would never ship as many watches as the retailers wanted. Demand always outstripped supply. As a result, the watches always maintained their luxury pricing—no need to discount to reduce inventory. This increased the luxury and exclusivity image of the brand. And in the luxury business, exclusivity and price integrity are extremely important.

According to Biver, “You only desire what you cannot get. People want exclusivity, so you must always keep the customer hungry and frustrated.” Hungry and frustrated? That doesn’t sound like someone striving for consumer satisfaction. No, but it has lead to great success. As in the grocery example, hunger makes people buy more. Hungry people are more engaged with what they are hungry for.

There are many ways to shun satisfaction and increase engagement.

1. Limit supply (never enough to satisfy)2. Have a continual stream of new products or product improvements (make the old obsolete—not enough to satisfy anymore)3. Cloak your product in secrecy (secret formula/recipe—like Coke and KFC, lots of mystery leads to increased curiosity)4. Tie product (or discounts) to exclusive membership (you have to be part of a special group to participate)5. Every time you ship/sell a product, include a promotion for yet another product (never allow a transaction to appear as the final one).6. Sell things in installments (you don’t get it all at once)

It’s sort of like the striptease. Anticipation is heightened and made more enjoyable by not giving the audience everything they want right away. They are more engaged in the process.

So when planning your strategic approach, are your goals and tactics centered around creating satisfaction or around creating engagement? How are you planning your production supply versus anticipated demand? Are you trying to leave the customers a little hungry? Are you teasing them?

SUMMARYStriving for total customer satisfaction can be a sub-optimal strategy. When customers are fully satisfied, they no longer need to buy what you are selling (demand is sated). Instead, your strategy should strive towards customer engagement. Keep the customer a little hungry and they’ll come back for more.

FINAL THOUGHTSWalt Disney once said that the first rule of show-business was simple: "Always leave them wanting more." That’s probably a good rule for your business, too.

Monday, November 30, 2009

THE STORYMany years ago, I was working at a company that was having mediocre (at best) performance, yet paid its top executives quite well. I complained about the high pay relative to the performance and was told, “You have to pay a lot to get this caliber of management.”

My reply was, “Are you saying that if I pay less I can get a better caliber of leaders?”

THE ANALOGYMy point (half in jest) was that if a company pays too much money to top management, they will attract people who are primarily there to satisfy their personal greed. Pay less and that caliber goes away, replaced by people who are more motivated by doing a good job for all the business stakeholders.

Before throwing me overboard as a heretic, consider an article published today in the Wall Street Journal in collaboration with the MIT Sloan Management Review. The article advocated eliminating the executive bonus, using words which echoed some of my assessment. In particular, the article said,

“It has been claimed that if you don’t pay [bonuses], you don’t get the right person for the CEO chair. I believe that if you do pay bonuses, you get the wrong person in that chair. At the worst, you get a self-centered narcissist. At the best, you get someone who is willing to be singled out from everyone else by virtue of the compensation plan.”

This article was not written by some young anti-capitalist revolutionary. It was written by Dr. Henry Mintzberg, a long-time business professor at McGill University.

While I disagree with Mintzberg’s ultimate conclusion to eliminate bonuses, I agree that the current system is a bit broken. And my biggest concern is not about the greed. A little greed can be a useful motivational tool. My key concern is that compensation influences action, and long-term strategic actions tend to get little emphasis when the compensation plan is created.

THE PRINCIPLEThe principle here is that people act based on how they are rewarded. Therefore, if you want leaders to act in the best interest of the strategic plan, make doing so a key part of the reward plan.

Now some might argue that long-term strategies are already well baked into most executive compensation plans. After all, most of them have a large component tied in some way to stock price. Doesn’t a rising stock price represent some sort of approval of long-term future strategic performance?

The problem is that there are a large number of causes for rising/falling stock prices which have virtually nothing to do with implementation of a strategic plan. These causal factors can include everything from short-term financial manipulations (that have nothing to do with strategy) to stock buybacks to macro-economic factors outside a company’s control. Given all the factors which impact a stock, it is virtually impossible to isolate how much the price fluctuation has to do with strategy implementation (or lack of implementation).

In fact, there can often be a negative correlation. By cutting back on investments with more strategic, long-term impact, one can make the near-term results look better, which can temporarily increase stock prices. Of course, this is like saving money today by eliminating automotive maintenance, only to have a longer-term disaster when the engine eventually blows up due to lack of maintenance.

At best, stock is a weak indicator of strategic success. At worst, it is a false indicator which only corrects itself after it is too late and the damage is already done.

A good strategic plan is a roadmap to the future. It shows your desired destination and an action plan of steps to get there. If you want to give incentives for strategic success, then reward achieving those particular actions elaborated in the plan.

For example, your strategy could outline specific action plans similar to the following:

1) Shifting the product portfolio mix in a particular direction (less of some types of products, more of others).2) Shifting the customer mix in a particular directions (less of some types of customers, more of others)3) Shifting the way particular work is done, so that it is more productive.4) Shifting the perception of the company’s position in the marketplace.5) Entering particular new businesses, geographies, or customer segments.6) Exiting particular old businesses, geographies, or customer segments.7) Gaining market share from a particular competitor.

These are actions that can be measured—did you accomplish them or not? If yes, you get rewarded; if no, then no reward. Action-based compensation is more closely aligned with strategic plans than near-term financial outcomes or today’s stock price.

Step #1: Have Actions Written Into Your PlansOf course, this assumes that your strategic plan includes concrete and specific action steps/goals. If it does not, then I question the value of your strategic planning process. Therefore, the first step is to make sure your strategy is linked to actions. Just providing a vague platitude like “We will be great corporate citizens while providing our shareholders with an adequate return” is not enough.

Somewhere in the strategic plan one needs to explain in broad terms what actions must be accomplished. And remember, numbers are not actions. Saying “We will increase profits by 50%” gives no strategic insight into how to bring this idea to reality. One needs to explain how this is to come about—what needs to be done.

Step #2: Put Actions into CompensationNow, assuming we have actions described in our plans, the next step is to get those actions into the compensation program. Setting compensation is not just the responsibility of the Human Resources Department or the Compensation Committee of the Board of Directors. If you want people motivated to accomplish the strategic plan, then take responsibility for getting that accomplishment rewarded in the compensation program.

The idea is to reward if the action is accomplished and not reward if the action is not accomplished.

Step #3: Watch Out for CheatersNo matter how a compensation system is set up, employees (including top executives) will try to find a way to exploit the rules to their advantage. For example, if my goal is to expand into bio-technology, I can do so very quickly if I am willing to acquire a bio-tech company for 1,000 times what it is worth. I got the task done, but in a way that could bankrupt the company by paying too much.

No compensation system is 100% free from cheaters. Loopholes can always be found. But at least with an action-based system cheaters need to at least accomplish something related to the plan.

Some safeguards can be put into the compensation system to ensure that the actions are not blatant abuses of the system. Approvals will need to look at the quality of the action, not just the quantity. Limits need to be placed on how many resources you use as inputs in order to get those outputs, to ensure that there is a positive return on investment.

This should stop a lot of the abuse. And if a habitual cheater still regularly abuses the system, then maybe the problem is not the system, but the person.

Step #4: Properly Size the PrizeIf a bonus is too large a percentage of total compensation, then you are increasing the likelihood for abuse. You are also increasing the likelihood that you will be attracting people motivated by excessive unproductive narcissism, rather than people looking out for all of the various stakeholders.

Therefore, make the bonus a minority of total compensation—enough to incent the right strategic behavior, but not so much that it creates unbalanced behavior.

SUMMARYBonus systems are effective at providing an incentive for action. If set up wrong, they can provide an incentive to do the wrong things. They may even provide an incentive to attract the wrong people. However, if managed properly, bonuses can create the incentive to accomplish your strategic plan. This requires: a) Putting Actions into your Strategic Plan; b) Giving Rewards when those Strategic Actions are Accomplished; c) Putting in Safeguards to Slow Down Blatant Abuse of the System; and d) Making sure that the Size of the Bonus is kept below a level which Distorts Greedy Behavior too Much.

FINAL THOUGHTS Next time you hear someone say they are “results driven,” ask them what they mean by that. Does it mean they are driven to achieve a number on an income statement regardless of how much strategic damage is done in the process? Or does it mean they are driven to get the right tasks accomplished in the right way?

Tuesday, November 24, 2009

THE STORYBack in 1972, Bill Barnes was at a convenience store in Grand Rapids Michigan, scratching a lottery ticket, when he felt a hand in his pocket. At the time, Bill had about $300 in cash in that pocket.

Not wanting to lose the money to the pickpocket, Bill started punching the pickpocket with his fist, over and over again. The pickpocket, 27 year old Jessie Rae, was really getting beat up. There was blood everywhere. Afraid for the pickpocket’s life, the store owner tried to protect Jessie from further harm until the police could arrive.

Jessie thought he had picked the perfect victim to pickpocket—a 72 year old man. Little did he know that this 72 year old Mr. Barnes was a former marine and gold gloves boxer.

THE ANALOGYIn the world of pickpockets, the pickpocketer only wins if his victim loses. It’s a constant sum game. The more you lose, the more he gains.

This is often true in the business world. There may be only a certain amount of demand for a product or service. The more the competition takes, the less business available for you, and vice versa.

It’s like living in a world where everyone is a pickpocket. Competitors want to win by picking sales out of your pocket. Similarly, for you to win, you need to pick their pocket.

When on vacation, people are often warned of pickpockets, and so they are especially careful. They put their money and valuables into money belts, which are harder to steal. They keep their eyes open, and their handbags shut.

Since businesses operate in a similar pickpocket world, our strategies should include ways to protect our valuables as well.

THE PRINCIPLEThe principle here is that we need strategies that help us optimize in a world where we are both a pickpocket and a potential pickpocket victim.

A. Acting Like a PickpocketI once worked with a company with multiple divisions. Each division was required to supply me with a copy of their long range plan. As part of the packet I gave them to help them develop their planning was the following set of instructions:

1) Assume that the overall market is only expected to grow by 1% per year.

2) If you want to grow at more than 1% per year, then you will need to take share from someone else. [In the jargon of this blog, that means that if we want to grow by more than 1%, we need to pick someone’s pockets.]

3) Therefore, if you are going to be taking share from someone else, tell me how much you are planning to take from each competitor. Then, you need to be able to convince me why your strategy is so compelling that you can successfully take that share (e.g., pick that pocket).

The point of this particular part of the planning process was to get these divisions to think like a pickpocket. In particular, a pickpocket needs to be good at two things:

1) Choosing a Target.Pickpockets do not randomly try to go after anybody and everybody. Instead, they scan the marketplace to find the most vulnerable target. They look for people who are easy to approach, easy to distract, and easy to steal from. The pickpocketing does not start until after the scan is complete and the vulnerable one chosen.

Your strategy should be the same. If you need to steal market share, first take the time to target specific competitors (and perhaps specific customers of those competitors). Find out which ones are easiest to approach, distract and steal from.

Don’t just assume that new customers will magically show up. First, figure out specifically who you want to go after and then go after them where they are today (in the other guy’s pocket).

2) Running the Plan/ScamMost pickpockets have an elaborate scam, or plan, to get your belongings. Often, it involves multiple people with different roles. One is the distracter, another is the pickpocket, and the third carries the goods away from the scene.

If you want to pick your competitor’s pockets, you need to design an intricate and coordinated plan as well. The money isn’t going to automatically jump from their pocket to yours. Your plan needs a compelling reason for customers to willingly switch to you. Usually there are switching costs to the consumer, so you have to provide such a compelling offer that the benefits overcome the switching costs. Just offering the same proposition as the competition is not enough. Usually it requires not only being superior, but being different in your approach to the competitor’s customers.

In addition, it helps if that plan is subtle enough that the competitor is unaware his pocket is being picked. If the competitor is fully aware of what you are up to, the competitor will make it more difficult for you to pick their pocket. Therefore, choose a path that is more indirect and harder to detect until after the pocket is picked.

B. Keeping Your Pocket From Being PickedWhile you are picking the pocket of your competitor, keep in mind that simultaneously the competitor is also trying to pick your pocket. Therefore, your strategy needs to put into place barriers to protect the business you already have. In particular, there are two actions to keep in mind.

1. Keep From Being in Vulnerable LocationsPickpockets tend to avoid people who are all alone or in protected locations. They prefer to go after people who appear a bit lost within a crowded, public location. Therefore, if you want to prevent getting your pocket picked, don’t put yourself in vulnerable positions.

This gets to the subject of your strategic positioning. A vulnerable strategic position tends to be a bit unfocused (“look lost”) and is in the middle of a crowded location where nobody solidly owns the space (a “public location”). By contrast, a protected position is a solid ownership of a particular space where you tend to be relatively uncontested (“alone” and “protected”).

Winners tend to stay out of the crowded “muddled middle” and stake out a strong ownership position at the edges. For example, you can win with a strong position in low price or a strong position in high quality. However, it is difficult to win if everything you offer is “average” (average prices and average quality, etc.). Being fuzzy and average makes you the most vulnerable to getting your pocket picked.

For example, in retailing, Wal-Mart has a solid ownership of low price and is doing well. Nordstrom has a solid ownership of high service and traditionally does well. Relatively unfocused stores in the middle, like Sears, are getting their pockets picked and are doing poorly.

2. Guard Your BelongingsTo keep your belongings from being picked, you need to protect them. Put a barrier around them, so that it is harder for the pickpocket to access them.

In business strategy, there are many ways to create barriers that make it more difficult for customers to leave you. They tend to fall into one of three categories:

a. Exclusivity – If you are the only one that offers a particular product/service, then it is more difficult for a customer who wants that exclusive item to leave you. For example, in the US, if you want an iPhone, you have to get it serviced by AT&T, because they have the exclusive carrier rights to the phone. This keeps people from leaving AT&T.

b. Bribes – If you offer the best deals or the best gimmicks/perks, then people will be reluctant to leave. In essence, you have bought off the customer with a “bribe.”

c. Handcuffs – Handcuffs are tactics that make it more beneficial for customers to stay where they are than to switch. These could be things like membership fees (I’ve already paid, so I may as well stay, rather than switch and pay a second membership fee), Volume-based reward programs (the more I stay and buy, the bigger the savings), and Knowledge Benefits (this company knows me and takes care of me, while a new company does not know me and my particular needs/desires).

SUMMARYIf you want to grow at a faster rate than the market, you will need to steal market share from someone else, like a pickpocket. The pickpocket’s strategy is to first select a vulnerable target and then run the elaborate scam on them. To protect your own pockets from being picked, find a solid position to own and then put barriers around your customers.

FINAL THOUGHTSIf a company gets too busy focusing on new initiatives, it can start ignoring the core, making the core business more vulnerable to pickpockets. Remember, thieves are everywhere, all the time.

Monday, November 23, 2009

THE STORYYears ago, I was watching a documentary on the history of the circus. According to the documentary, the circus industry reached its peak of popularity in the 19th century. The secret to their success at that time was their image. Circuses in the 19th century had the reputation for being on the leading edge of whatever was new. Whenever the next big thing in entertainment came about, the place where you saw it first was at the circus.

Circuses were noted as places of innovation and creativity. There was always something new to see at the circus. It was forward-thinking.

But then something happened. Circuses got in a rut, doing the same thing year after year. At the same time, innovative leading edge entertainment shifted to the movies, radio, and television.

At the end of the documentary, it said that circuses were trying to survive in the late 20th century by emphasizing the “nostalgic” aspect of the entertainment. The idea was that going to the circus was a way to re-live the past and remember a piece of your long-ago childhood. It was a way to re-capture that innocence of years gone by.

In other words, the industry that became popular for being associated with everything new was now trying to survive by attempting to be associated with everything old. How’s that for a change in strategy?

THE ANALOGYYou’d think that to change your image as radically as the circus, you’d have to radically change your actions. The irony is that the image changed precisely because the actions did not change. Circus acts of the late 20th century were not that different from circus acts of the late 19th century. You still had the same animals doing the same types of tricks. You had the acrobats doing the same types of stunts. The clowns did pretty much the same antics.

The difference was that in the late 19th century, this was relatively innovative stuff. A hundred years later, it was old and out-of-date. Why watch an elephant try to stand on its hind legs when you can rent a movie with state-of-the-art special effects that place you in an exciting visit to an alien world?

This same problem can happen to your business. You may have found a path to great success. Relying on the concept that “If it’s not broken, don’t fix it,” you leave the successful formula in place. However, the world around you changes. The changing environment changes the viability of that old formula. “New and Exciting” quickly morphs into “Old and Boring.” And success quickly turns into failure.Your success changes (for the worse) precisely because you did not change.

To save the circus industry, Cirque du Soleil needed to reinvent the circus into something modern and cool. It took a massive departure from tradition to do this. Perhaps you need to do the same.

THE PRINCIPLEThe principle here is that you do not control all of the factors which impact your image/strategy. External factors are constantly changing/evolving. As a result, your company/brand’s relevancy to that environment is constantly changing/evolving. Consequently, you have to make one of two choices:

1) Continually Update your Actions to Maintain the Same Level of Relevancy; or2) Maintain Somewhat Similar Actions and Find New/Different Ways to Make them Relevant.

These options are discussed below.

1) Continually Update your Actions to Maintain the Same Level of RelevancySuccessful companies tend to own a desirable space in the marketplace. For example, Wal-Mart owns “low price” in the retail marketplace. As the marketplace evolves, your ability to continue to own that space can change. You may need to change in order to maintain ownership of that space.

Take Apple, for example. Apple was known as the “cool” computing company. Unfortunately, the novelty of computers was fading and just having a computer was no longer enough to be cool. Computers were progressing towards becoming a boring, commitized tool, something like a hammer.

So to maintain and grow that image of “coolness” in computing, Apple needed to change its actions. It needed to take its computing expertise to the newer, cooler places of iPods and iPhones. Owning these is really cool, and Apple was a leader in this evolving change in what constitutes a cool device.

Compare this to Dell, who is trying to look cool predominantly through just computers. It is struggling. Had Apple stayed only in computers, I suspect they would be seriously struggling, as coolness moved to Blackberries or whatever. Apple could have become like those outdated circuses had it not moved with the marketplace to maintain its cool factor.

Similarly, Wal-Mart saw that there were changes in the marketplace that could threaten their ability to own the low price space. In the 1980s, Warehouse clubs were starting to show the ability to underprice Wal-Mart discount stores, so Wal-Mart created Sam’s Club. Later, in the 1990s, supercenters were showing the potential to underprice discount stores, so Wal-Mart converted its discount stores into supercenters.

The strategy at Wal-Mart is to chase whatever shows potential for unseating Wal-Mart’s ownership of the low price space. Today, the new threat is the internet, so Wal-Mart has recently decided to get more aggressive in that space. Wal-Mart is ever-changing in order to keep is reputation for owning low price unchanging.

2) Maintain Somewhat Similar Actions and Find New/Different Ways to Make them RelevantSometimes, it can be difficult to do the types of changes Apple and Wal-Mart did to maintain their relevancy. Therefore, instead of changing the actions, you may need to change the way you make yourself relevant.

Years ago, I was talking to some executives at General Mills. They were telling me about the evolving relevancy of Hamburger Helper. When Hamburger Helper was first introduced, it owned the space for dinner-time convenience. At that time, the average time to prepare a dinner was about 45 to 90 minutes. Hamburger Helper took only about 20 minutes. Hence, Hamburger Helper was a huge time-saver and the more convenient way to prepare a meal.

Then the marketplace changed. Microwave cooking came about, redefining what was considered a normal amount cooking time. In addition, there was an explosion in the number of people serving meals obtained from a fast food drive-up window. Suddenly, for a large sector of society, dinner preparation was down to around 10 minutes or so. In a world accustomed to 10 minute preparation time, the 15-20 minutes it took to make Hamburger Helper no longer appeared convenient.

General Mills tried to speed things up with faster-cooking noodles and microwave versions, but for years none of the experiments met the quality levels demanded by General Mills. Therefore, General Mills had to change the relevancy of Hamburger Helper. A revised advertising campaign for General Mills stressed how the quality and taste of Hamburger was worth the extra effort. With the latest economic recession—yet another shift in the environment—Hamburger Helper is now repositioned as being the low price alternative.

Toy companies like Hasbro are finding that the older “uncool” toys in their portfolio can be made relevant again by repositioning them as movie merchandise. GI Joe and Transformers are some of the latest examples. Based on their success, all sorts of old toy brands are being licensed to movie studios, including the old board games Monopoly and Risk. If movies are where the cool entertainment factor is, then associate the toys with that movie experience.

SUMMARYThe changing environment can change the relevancy of your strategy. You can respond in one of two ways. Either change what you do in order to regain that same relevancy or find a new relevancy for what you are doing. Doing neither will eventually make your brand/company irrelevant.

FINAL THOUGHTSWhen my children were little, I took them to the circus. The most exciting part of the evening was when one of the elephants decided to have a major bladder emptying right there on stage. The circus stage crew had to truck in a huge pile of sawdust in order to soak up all of the elephant urine (during the middle of the show). My son thought that was pretty cool. The rest of the circus, though, he was not impressed with. Let’s hope you don’t have to resort to what the elephant did in order to be relevant to your audience.

Wednesday, November 18, 2009

THE STORYBack in the 1950s, malaria broke out amongst the Dayak people of Borneo. It was serious enough to call in the World Health Organization (WHO) to find a solution. Their solution? Spray large amounts of the chemical DDT on the island.

The good news was that this effort was effective in killing most of the mosquitoes which carried the malaria. The bad news was that there were a series of negative side effects.

First, the thatch roofs on the houses started collapsing because the DDT also killed off the wasps which ate thatch-eating caterpillars. Second, many of these insects that were poisoned got eaten by gecko lizards, which ended up poisoning the lizards. Third, cats which ate the lizards got poisoned and started to die.

Without the cats to eat them, the rat population exploded. The rats carried diseases, such as sylvatic plague and typhus. With so many rats around, there was an outbreak of these diseases in the human population of Borneo.

Hence, the World Health Organization was called back in to solve this new health problem in Borneo (which, by the way, they had created). Their solution? Parachute live cats into Borneo.

THE ANALOGYThe World Health Organization was given a task—eliminate a serious outbreak of malaria in Borneo. They developed a solution which accomplished the task immediately in front of them. Unfortunately, WHO’s choice of action had negative unintended consequences.

It was not just one batch of unintended consequences, but a series of them. There were five layers in this series of unintended consequences:

Layer one: DDT killed more insects than just the ones carrying malaria.Layer two: Lizards who ate the poisoned insects became poisoned.Layer three: Cats who ate the poisoned lizards became poisoned.Layer four: Without the cats, the population of rats skyrocketedLayer five: The skyrocketing rat population infested the humans with new disease outbreaks.

Businesses have many problems to deal with, just like the WHO. In the rush to solve the immediate task at hand, businesses risk doing the same thing the WHO did—choose a path that solves the immediate problem, but has a series of negative unintentional consequences.

Just solving the problem of the moment is not enough. If we ignore the long term consequences in our decision-making, we can end up having our own version of parachuting cats.

THE PRINCIPLEThis story touches on two principles we have talked about often—the tyranny of the immediate and the law of unintended consequences. The tyranny of the immediate occurs when solving the crisis of the day is the only task you get time to work on, leaving no time for long-term thinking. You can read about the tyranny of the immediate here, here, here, and here.

The law of unintended consequences says that decisions you make often affect more than you realize, and usually in a negative manner. You can read about the law of unintended consequences here, here, here, and here.

The first point I want to make in this blog is that the more a company is held hostage to the tyranny of the immediate, the more likely it will create unintended consequences. If the WHO hadn’t been so focused on the immediate crisis of malaria, they might have taken the time to realize that heavy doses of DDT create more problems than they solved.

The second point is that unintended consequences often come in layers. If you only look out one or two layers, you can miss the serious negative side effects. Killing a few wasps and lizards doesn’t sound too bad. It wasn’t until you got to layer five (sylvatic plague and typhus outbreaks in humans) that the really bad negative consequence appears.

The same is true in business. Often, you cannot see the real disaster ahead until you look out a few layers. Look at all the layers of unintended consequences which came out of the simple decision to bundle high-risk mortgages. It didn’t just crush the housing market. Subsequent layer after layer of unintended consequences almost lead to a total global economic meltdown.

This leads into the third point. I believe that one of the most critical roles a strategist provides a company is the ability to look for all the layers of unintended consequences. While most of the rest of the organization copes with the tyranny of the immediate, the strategist can rise above the immediate and focus on the long-term implications—layer upon layer. This expertise will be an invaluable contribution to the discussion on how to handle the crisis of the moment. This contribution can help prevent a firm from going down a disastrous path ending in some version of parachuting cats.

In order to make this contribution, two factors must be kept in mind:

1. Avoid Setting Up the Strategist in a Position Where They Get Sucked Too Far Into the Tyranny of the Immediate.If the strategist is given too much responsibility for near-term performance, then the risk is for the strategist to be doomed to just as much tyranny of the immediate as everyone else. When that happens, the strategist cannot provide that critical long-term perspective going out several layers, because they have no time to think about it.

I see this risk cropping up in two areas. The first is in the role of the Chief Marketing Officer (CMO). CMOs Officers are often given two roles. First, they are responsible for the long-term positioning/strategy of the brand. Second, they are responsible for the near-term sales and advertising promotions.

The first role is to rise above the tyranny of the immediate to protect the long-term brand strategy from unintended consequences. The second role dives deep into the middle of the tyranny of the immediate, trying to put out the fires that affect near-term sales.

From my observations, when someone has two roles like this, the tyranny of the immediate wins the battle for time. The long term suffers. It is no wonder that the average CMO tenure is less than one year. They are set up to fail because it is so hard to fulfill both of those requirements. For more on this, see CMOh, No!.

The second place where this problem can come about is if the strategist is in the Finance Department and also has responsibility for the annual budgeting process. There is a risk that so much attention will be placed on the one year budget and worrying about variances in current performance to this year’s budget, that the long-term concerns will be pushed aside.

The tyranny of trying to get this month’s/quarter’s/year’s numbers to turn out as budgeted can lead to hasty decision-making. You may find a way to get the numbers to work, just as the WHO found a way to get rid of malaria. However, the long term consequences could cause grave tragedy several layers into the future. You’ll be parachuting cats before you know it.

Therefore, I believe that strategists need to be protected from the tyranny of the immediate in their job responsibilities. You’ve got a whole company to deal with today. Let the strategist devote their time to examining all of those layers of consequences into the future.

2. Avoid Setting Up the Strategist in a Position Where they have No Influence on the Immediate.Of course, if this isolation from the immediate is taken to an extreme, there can also be problems. The long-term perspective of the strategist needs to be applied to the decisions of today. Otherwise, what good is having that perspective?

Strategists shouldn’t be locked up in an ivory tower and only be allowed out in the spring for an annual planning off-site meeting. Not only does that make the strategist out-of-touch with what’s going on, it makes them irrelevant at the point in which operational decisions are made.

If the WHO had a strategist locked up somewhere, he could have come out in the spring and said, “I knew that DDT spraying would cause more harm than good. I knew those bad layers would occur.”

That does nobody any good. What was needed was to bring such a strategist into the room at the time the decision on DDT was being made and get the strategist’s perspective BEFORE making the move.

Don’t exclude the strategist from the core daily decision-making. Get that long-term multi-layered perspective. Use that perspective in your analysis before making the decision.

SUMMARYTo avoid negative unintended consequences, one needs to include a longer, multi-layered perspective into the discussion during the tyranny of the immediate. The best way to do that is to have the strategist participate in the discussion without being held accountable for the pressures of the immediate.

FINAL THOUGHTSEverything is interconnected. Once you realize this, it is easier to find and prevent those unintended consequences. And the good news is that the more you eliminate those unintended consequences, the less you will be held hostage in the future to the tyranny of the immediate (which is often caused by unintended consequences).

Monday, November 16, 2009

THE STORYI friend of mine who worked in the brewery business used to like to tell this story. There was a bar across the street from a factory that made beer. A lot of the guys who worked at the brewery factory would go to that bar after work. Sometimes, the managers at the brewery would visit the bar as well.

One day, one of the managers from the factory was in the bar. He saw one of the factory workers in that bar drinking a beer made by a competitor. The manager was infuriated that one of the factory workers would dare to drink a competing brand of beer. To him, that was an act of treason.

The more he watched, the more incensed he became at what he perceived as the unloyal behavior of this factory worker. Eventually, the manager couldn’t take it any longer. He went up to that factory worker and shouted “Who do you work for?”

The factory worker answered, “The local of the International Union of Brewery Workers.” So much for the disloyalty argument.

THE ANALOGYAs the story points out, how one defines themselves has a lot to do with how someone behaves. The manager defined himself as working for a particular brand of beer. Therefore, he was loyal to that brand and could not conceive of why any employee would drink any other brand of beer.

By contrast, the factory worker saw himself as working for the local brewery union. As long as he was drinking any beer produced in a union factory, he was supporting the union. His loyalty was to his fellow workers rather than to the brand of beer they made.

One of the most important strategic questions a company must answer is this: What business am I in? How you define your business will determine how you act. If you choose the wrong definition, you will wind up doing the wrong actions. This will then lead to the wrong outcomes.

THE PRINCIPLEThe principle here is that a good strategic process needs to, at some point, define what business the company is in. I call this “the Defining Moment.” Here are three things to avoid when creating that definition.

1. Avoid Too Narrow of a DefinitionIf you define the business too narrowly, you will miss opportunities. Back in 1960, Theodore Levitt published what is considered to be one of the 10 most influential articles in the history of the Harvard Business Review. The article was entitled “Marketing Myopia.”

In this article, Levitt claimed that a lot of business stopped growing or failed because they defined their business too narrowly. For example, he claimed that the railroad industry stagnated because the members narrowly defined themselves as in the business of “railroading” instead of in the broader business of “transportation.” Transportation grew rapidly while railroading stagnated. Had the leaders defined themselves more broadly, they could have participated in that transportation growth. Instead, they went down with their narrowly defined product.

All products and service offerings have a life cycle. If you define yourself by today’s product or service, your company’s fate is tied to that lifecycle. You will die when that product dies. Kodak’s fate declined because it spent too long defining itself as in the narrow “analog photo business”, rather than in the broader “imaging” business. Imaging hasn’t gone away. It has grown. But Kodak missed all that growth because of defining itself too narrowly.

2. Avoid Too Broad a DefinitionOf course there are also problems if you take the opposite extreme of defining yourself too broadly. If you define your mission as “making a large return on investment” you have provided no guidance to the company. The definition is too broad to have any meaning or direction.

Without direction, you have anarchy. Anarchy leads to chaos and destruction, not success. Success requires a focus. A company without focus one cannot excel at creating a point of competitive distinction that will allow them to win in the marketplace. Rather than being a team focusing its limited resources at a point where it can make a real difference, you are just a bunch of individuals working at cross-purpose to each other. A company definition needs enough detail to point at where you will focus your effort in order achieve that advantage.

3. Avoid Definitions Out-of-Sync with Your True Skill-setIn addition to finding the right balance between defining yourself too narrow or too broad, one needs to address the fit between you definition and your capabilities. For example, I could define myself as being in the low-cost transportation business. However, if I have an unusually high cost structure, I will almost assuredly fail at that mission. That definition did not match up with my capabilities.

Although it is possible to change a company’s skill-set or culture, it is extremely difficult. Most attempts fail. Therefore, successful business definitions tend to look for ways to exploit the good in the current skill-set or culture, rather than trying to start all over again from scratch.

I was reminded of this need to align with skill-sets this morning as I was reading the Wall Street Journal. There was an article on page 1 talking about firms which appeared to be on the verge of bankruptcy but were saved from that fate (or at least postponed it) due to an increased availability of refinancing options.

One of the “near death” companies getting a reprieve that was mentioned in the article was Blockbuster, the leading movie rental retailer. I believe that one of the reasons Blockbuster got into so much trouble was because of how they defined their business.

Blockbuster has traditionally defined themselves as being in the entertainment business. In 2007, the revised business mission continued this entertainment focus: “To provide convenient access to media entertainment.” Sure, Blockbuster rents a lot of movies and games, but is entertainment really at the core of their culture and skill-set?

Blockbuster has shown no real skill in creating entertainment. They have no unique skill in developing forms of entertainment media. My understanding is that within the entertainment community, most of the other players hold animosity towards Blockbuster to the point where it puts them at a disadvantage versus other partners in doing media deals.

If entertainment is not Blockbuster’s core, then what is? First, it is the ability to run small neighborhood stores. At their peak a few years ago, Blockbuster operated or franchised over 9,000 stores. Most of these were in neighborhood locations.

Second, Blockbuster is a pretty good deal-maker with outside partners. One of the reasons why the entertainment industry is hesitant to do any more deals with Blockbuster is because they did not like how well Blockbuster negotiated against them when the video rental business first started.

Now, if you define yourself as in the entertainment business, you might be prone to do many of the things Blockbuster has done in the past few years (try to align with Radio Shack, try to imitate Netflix, look into non-conventional media delivery ideas, etc.). Unfortunately, these moves have not produced very good results.

However, what if Blockbuster had defined itself as being in the neighborhood retail business? Perhaps then they would have considered other ways to leverage that retail infrastructure:

1) As a convenient pick-up point for packages purchased on the internet (so that they are not vulnerable to theft off your porch while you are at work).

2) As a convenient pick-up point for groceries ordered on-line (a place that can keep the cold items cold until you can get around to picking them up).

3) A convenient drop-off or pick-up point for items like dry cleaning, shoe repair, selling things on EBAY, etc.

Blockbuster could have focused on making deals with all sorts of non-media people and converted those stores into THE place to coordinate and protect all my neighborhood needs until I am ready to pick them up. Instead, they have been taking one of their most valuable assets—their dense network of neighborhood stores—and destroying it by closing down stores by the hundreds.

I’m not positive that this new approach would have saved Blockbuster, but I do know that their choice in how they defined themselves put this type of thinking out-of-bounds. Definitions impact decisions. Be careful in how you handle your defining moment.

SUMMARYThe way you define your business impacts the way you think about your business. This thinking them impacts how you act. The best strategic actions tend to take place when that definition avoids the extremes of being either too broad or too narrow as well as matching the definition with the key culture and skill-sets.

FINAL THOUGHTSThe defining moment can often be iterative. It may start out broader until the right strategic path is discovered. Then the definition may be narrowed a bit more around that strategic path.

About Me

I have over 25 years of experience, having worked in strategy with a number of leading US retailers. You can learn more about me by visiting my digital resume (www.VisualCV.com/geraldnanninga) of the site for consulting (http://planninga-from-nanninga.webs.com)